What is life insurance? Describe the procedure of affecting life insurance. [18]

Life Insurance: Definition and Procedure of Affecting Life Insurance

Definition of Life Insurance

Life insurance is a legal contract between an insurer (insurance company) and an insured (policyholder). Under this contract, the insurer agrees to pay a sum assured (a fixed amount of money) to the nominee (beneficiary) upon the death of the insured during the policy period. In return, the insured pays premiums (regular payments) to the insurer.

Life insurance serves multiple purposes:

• Financial security for dependents after the insured’s death.
• Savings and investment tool (in some policies like endowment or ULIP).
• Tax benefits under Nepalese and international tax laws.
• Loan facility against the policy (surrender value).

Life insurance policies can be classified into different types based on duration, benefits, and premium structure. Some common types include:

• Whole Life Policy (covers the entire life of the insured).
• Endowment Policy (provides a lump sum after a fixed period or death).
• Term Insurance (pure risk cover for a specific term).
• Money Back Policy (periodic payments along with the sum assured).
• Unit Linked Insurance Plan (ULIP) (combines insurance with investment).

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Procedure of Affecting Life Insurance

Affecting (or obtaining) a life insurance policy involves a systematic process. Below is a step-by-step procedure with explanations:

Step 1: Selection of Insurer

The first step is choosing a reputable and reliable insurance company. Factors to consider include:

• Financial stability of the insurer (check ratings from agencies like ICRA or CRISIL).
• Claim settlement ratio (percentage of claims paid by the insurer).
• Customer service and reputation (reviews, complaints, and past performance).
• Premium rates and policy benefits (compare different insurers).
• Network and accessibility (branches, agents, and online services).

In Nepal, major life insurance companies include:

• NIC Asia Life Insurance
• NMB Life Insurance
• Siddhartha Life Insurance
• Life Insurance Nepal (LIN)
• Nepal Investment Bank Life Insurance (NIBL)

Step 2: Selection of Policy

After selecting an insurer, the next step is choosing the right type of life insurance policy based on individual needs. Key considerations include:

• Age and health of the insured.
• Financial goals (savings, investment, or pure risk cover).
• Budget (premium affordability).
• Policy term (short-term or long-term).
• Riders (additional benefits) such as accidental death cover, critical illness cover, or waiver of premium.

Common types of life insurance policies in Nepal:

Step 3: Medical Examination

Most life insurance companies require a medical check-up to assess the health and life expectancy of the applicant. This step ensures:

• The insurer can evaluate risks accurately.
• The applicant’s premium is determined based on health status.
• Exclusions or loadings (additional premium) may apply if pre-existing conditions are found.

The medical examination typically includes:

• Blood and urine tests (for diabetes, cholesterol, etc.).
• Blood pressure and BMI check.
• ECG (Electrocardiogram) for heart-related risks.
• HIV and other disease tests (as per company policy).

Note: Some policies (especially small sum assured or term plans) may waive medical tests for applicants under a certain age (e.g., 35 years).

Step 4: Filling the Proposal Form

The applicant must fill out a proposal form provided by the insurer. This form contains:

• Personal details (name, age, address, occupation).
• Family medical history (genetic disorders, chronic illnesses).
• Lifestyle habits (smoking, alcohol consumption, travel risks).
• Nominee details (name, age, relationship).
• Policy preferences (sum assured, premium mode, riders).

Important Points:

• The applicant must disclose all relevant information truthfully (misrepresentation can lead to policy rejection or claim denial).
• The form is verified by the insurer before approval.

Step 5: Payment of Premium

After the proposal form is submitted, the insurer approves or rejects the application. If approved, the applicant must:

• Pay the first premium (can be paid online, via bank, or through an agent).
• Choose the premium payment mode (annual, half-yearly, quarterly, or monthly).
• Some insurers offer discounts for lump-sum or annual payments.

Premium Calculation Factors:

• Age (younger applicants pay lower premiums).
• Sum assured (higher coverage = higher premium).
• Health condition (pre-existing diseases increase premium).
• Policy type (whole life > endowment > term insurance).

Step 6: Issuance of Policy

Once the premium is paid, the insurer:

• Issues the policy document (either physically or digitally).
• Sends a copy to the applicant (via email or post).
• Activates the policy from the policy inception date (usually the date of first premium payment).

The policy document includes:

• Policy number and date.
• Sum assured and premium details.
• Nominee information.
• Riders and exclusions.
• Grace period and surrender value details.

Step 7: Renewal and Claims

After the policy is issued, the insured must:

• Pay premiums regularly (failure may lead to lapse of policy).
• Renew the policy if it is a limited-term plan (e.g., term insurance).
• File a claim in case of the insured’s death (nominee submits documents like death certificate, policy copy, and claim form).

Claim Settlement Process:

1. Intimation of Claim (nominee informs the insurer).
2. Submission of Documents (death certificate, policy document, medical reports, etc.).
3. Verification by Insurer (medical examination may be required).
4. Approval and Payment (sum assured is paid to the nominee within 30-90 days).

Grace Period:

• If the insured misses a premium payment, a grace period (usually 15-30 days) is allowed.
• If the premium is not paid within the grace period, the policy lapses, and no benefits are payable.

Surrender Value:

• If the policyholder surrenders the policy before maturity, they may receive a surrender value (a portion of the premiums paid, minus charges).
• This is common in endowment or money-back policies.

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Advantages and Disadvantages of Life Insurance

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Conclusion

Life insurance is a essential financial tool that provides security, savings, and tax benefits. The procedure of affecting life insurance involves selecting an insurer, choosing a policy, undergoing medical checks, filling forms, paying premiums, and receiving the policy. Understanding each step ensures a smooth and beneficial insurance experience.

For students preparing for NEB exams, it is crucial to:

• Memorize the definition of life insurance.
• Understand the step-by-step procedure clearly.
• Differentiate between policy types and their suitability.
• Know the claim and renewal process for practical application.

By following this structured approach, students can score full marks in their Business Studies exams.